McGraw-Hill/Irwin Copyright 2006 by The McGraw-Hill Companies, Inc.

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 Salesperson Compensation and Incentives

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Learning Objectives Discuss the advantages and limitations of straight salary, straight commission, and combination plans. Explain how and why a bonus component to compensation might be used as an incentive. Understand the effective use of sales contests, as well as the potential pitfalls of their use. Identify key nonfinancial rewards, and how and why they might be important. Recognize key issues surrounding expense accounts in relationship selling. Discuss making decisions on the mix and level of compensation.

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Key Compensation Questions Which compensation method is most appropriate for motivating specific activities in specific situations? How much of the total compensation should be earned through incentives? What is the best mix of financial and nonfinancial compensation and incentives?

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 7-5

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Key Definitions Salary – a fixed sum of money paid at regular intervals Commission – a payment based on short- term results, usually a dollar or unit sales volume Bonus – a payment made at management’s discretion for achieving or surpassing some set level of performance

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Compensation Methods for Salespeople Compensation Method Especially Useful For AdvantagesDisadvantages Straight SalaryNew sales reps New sales territories Many required nonselling activities Maximum security Control over reps Easy to administer Predictable expenses No incentive Requires close supervision Selling expenses remain same during sales declines

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Compensation Methods for Salespeople Compensation Method Especially Useful For AdvantagesDisadvantages Straight Commission Highly aggressive selling Minimal required nonselling tasks When company can’t closely control sales force Maximum incentive Managers can encourage sales of certain items Selling expenses relate directly to selling resources Little security Little control over reps Reps may provide inadequate service to smaller accounts Selling costs less predictable

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Compensation Methods for Salespeople Compensation Method Especially Useful For AdvantagesDisadvantages CombinationSimilar sales potential across territories When company wants to offer incentive but maintain some control Some security Some incentive Selling expenses vary with revenue Manager has some control over nonselling activities Selling expenses are less predictable May be difficult to administer

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Combination Plans Offer a base salary plus some proportion of incentive pay Most popular form of compensation Well-suited for relationship selling by compensating for nonselling activities while providing incentives to motivate sales

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Design Questions for Combination Plans What is the appropriate size of the incentive relative to the base salary? Should a ceiling be imposed on incentive earnings? When should the salesperson be credited with a sale? Should team incentives be used? If so, how should they be allocated among team members? How often should the salesperson receive incentive payments?

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Sales Contests Short-term incentive programs designed to motivate to accomplish specific sales objectives Contest winners receive prizes, recognition, and a sense of accomplishment Successful contests require: Clearly defined, specific objectives An exciting theme Reasonable probability of rewards for all Attractive rewards Promotion and follow-through

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Criticisms of Sales Contests May not produce lasting improvements Salespeople may borrow sales from another period to increase sales during the contest period Poorly administered contests can hurt cohesiveness and morale

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Nonfinancial Rewards Recognition is an attractive reward because it makes a salesperson’s peers and superiors aware of outstanding performance Effective recognition programs: Offer everyone a reasonable chance of winning Recognize the best performers across several dimensions

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Expense Account Types Direct reimbursement – direct and unlimited reimbursement of all “allowable and reasonable” expenses Limited reimbursement – either sets expense limits by-item or provides predetermined lump sum No reimbursement – requires salespeople to cover all expenses; usually combined with higher total financial compensation plan

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved. 7-17

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Mix and Level of Compensation An appropriate mix and level of compensation should –Maximize compensation plan’s motivational value –Be fair –Remain consistent with firm’s resource capabilities

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Key Terms compensation plan salary incentive payment commission bonus quota sales contests benefits nonfinancial incentives variable commission rate draw perquisites (perks) expense account

McGraw-Hill/Irwin Copyright © 2006 by The McGraw-Hill Companies, Inc. All rights reserved Mark W. Johnston Rollins College Greg W. Marshall Rollins College